For centuries people tried to find a way of turning common metals into gold.

Even the great thinker Isaac Newton tried his hand at alchemy. The Federal Reserve under the direction of Ben Bernanke appears to have succeeded. It has found a way to pump billions of new dollars into the economy each month and, according to its own pronouncement, keep interest rates close to zero for years to come.

It seems too good to be true, and for those seeking home mortgages, car loans and everything else that has an interest rate, it is good news. Why didn't the Federal Reserve do this before?

Heck, why doesn't it do this all the time? Just keep interest rates at zero percent forever!

When I teach students about the Federal Reserve and monetary policy, I always start the discussion with this question: "Who determines interest rates in the U.S.?" And someone always says "the Federal Reserve." And it must be true; the headlines say so: The Fed Keeps Interest Rates Low.

So I tease out this connection a bit. I point out that the Federal Reserve has only existed for the past hundred years and I say, "So interest rates didn't exist before that?" Students suddenly look befuddled.

But the fact is that the U.S. did not have a central bank until 1914, while interest rates have existed for thousands - yes, thousands - of years.

The Federal Reserve exists "to furnish an elastic currency" to quote from the Federal Reserve Act. Before the Federal Reserve came into being, the government did not have a standardized way of getting currency into and out of the economy. Once the Federal Reserve was in place, it could buy or sell government bonds from banks, and so increase or decrease the money supply.

Money's main purpose in the economy is to facilitate transactions; it lets us buy things more easily. If we have no money, we have to trade goods directly - that is, barter. That takes time, as bartering requires that we find someone who has what we want and who wants what we have.

Money makes transactions instantaneous - and easy. We sell what we have for money, and then buy what we need with same.

But this means that there has to be a connection between money and prices. Simplifying things a bit, suppose the economy is 100 apples that are sold once a year and the money supply is $100 that is used once a year. The price of apples would be $1 per apple.

If we increase the money supply to $1,000, but we don't change the number of apples or the frequency with which the money is used, the price of apples would rise to $10 per apple; more money is chasing the same amount of goods. If the money supply increases every year by more than the supply of apples, the price of apples will rise every year and inflation occurs: a sustained increase in prices.

So controlling the money supply is crucial to controlling inflation.

The simple answer to why the Federal Reserve doesn't always keep interest rates at zero is that it can't possibly do that without causing inflation. If the Federal Reserve is buying government bonds with new money, it can force the price of those bonds to be anything it wants. So by determining their price, the Federal Reserve can make the return on government bonds be anything, including zero percent.

Effectively, this would mean the government is printing new money and using it to make its purchases. The fancy word for printing money as way to pay for government expenditures is seignorage. If you and I did it, it would be called counterfeiting, but really, it's the same thing.

Let's return to our apple economy in which apples cost $1. There are 100 apples and the government needs 10 of them. The government could tax away 10 apples, i.e., charge a 10 percent income tax paid in apples. This would not affect the price of apples, only their ownership. The government would then be able to sell 10 of the apples during the year like anyone else and the 100 apples for $100 would still mean a price of $1 per apple.

Alternatively, the government could print 10 extra dollars and allow itself to buy apples before anyone else. They would be able to buy apples at $1, but the remaining 90 apples would now have to sell for a higher price. There still would be $100 in the hands of our citizens. So the remaining 90 apples would cost roughly 10 percent more.

Seignorage simply causes the price of goods to rise. Printing money to pay for government expenditures substitutes an inflation-sales tax for the income taxes. In many countries where income taxes are hard to collect, this is precisely how the government finances itself.

Seignorage causes inflation in this example because the government did not do anything to increase the supply of apples; the money supply increased by 10 percent and the apple supply didn't change.

Using Federal Reserve data, the money supply in the US increased by somewhere between 7 percent and 11 percent during the past year (depending on which measure of the money supply one uses).

The economy, our national supply of apples, grew by less than 3 percent over that same time.

We have a lot more money chasing our apples. It has to cause inflation. Most of the statistics say inflation is still low - 2.5 percent or 3 percent. The money is there, but it isn't being used - yet.

Right now, banks are sitting on a lot of that money. So-called excess reserves, the cash that banks have on their balance sheets in excess of Federal Reserve requirements, have skyrocketed to $1.5 trillion. And the Federal Reserve seems to believe that it can suck money out of the economy the minute banks start lending those reserves out and the money starts causing inflation.

One wonders if the Weimar Republic of Germany in the 1920s felt the same way. By the time its economy collapsed under the weight of excess money growth, the inflation rate had exceeded a 1,000 percent per year. Excess money growth causes inflation. And no one - not even our magical Federal Reserve - can change that.

So, don't expect a zero interest rate for long. It just can't happen. Common metals cannot be turn into gold and the Federal Reserve cannot conjure up low interest rates forever.

Jay Prag is a professor at the Peter F. Drucker and Masatoshi Ito School of Management at Claremont Graduate University. Prag also serves as academic director for the school's Executive Management Program, and can be heard weekly on "Inland Empire News Hour" on KTIE-AM 590.